New regulators: Careful what you wish for

A widely reported interview with a Union Cabinet minister a couple of days ago may be a pointer to policy thinking and future legislation. It calls for pause and deeper reflection. Complaining about how steel and cement prices have kept rising without commensurate justification, the minister called for tackling alleged cartelisation by setting up a new regulator for each of these sectors.

There is indeed already a law to deal with cartelisation (Competition Act, 2002) and an agency to enforce the law (Competition Commission of India).  If the perception is that the law and the agency have not achieved enough, the answer would lie in examining first, what, if anything is lacking, and what may address any lacunae.  To call for new regulators would be to fall into the usual Indian policy formula: Show me a problem and I will write you a law; show me a market problem and I will create for you a new regulator.

If past experience is anything to go by, creating a new sectoral regulator for a specific industry is more likely to undermine the objective of combating anti-competitive conduct. To begin with, the stated protectees of these regulators typically are consumers — the capital market regulator’s mantra is investor protection, the insurance regulator’s mantra is policyholders protection, and the like.  Entities regulated by them are not protectees of unfair competition and infliction of injury on one another.  Therefore, if the big daddies in a sector gang up to create practically impossible terms of conduct for other competitors who may actually want to innovate for the benefit of the protectees, there is a high chance that the innovator would be branded a disruptive upstart who needs greater regulatory scrutiny.

Sectoral regulators have always been prone to using loose language in their regulations requiring “good behaviour” and “professional conduct” and promotion of “orderly competition”, but they hardly have a framework to deal with it beyond motherhood statements from the perspective of being substitutes of well-codified competition law.  

When the CCI gets involved in enforcing competition law, the regulated entities simply have to argue that there is a sectoral regulator, which is the expert, and it must first deal with the issue.  The CCI is often required to hold its hands and eventually twiddle its thumbs, while those accused of violation merrily let the sectoral regulator and the CCI face-off on a turf war, while the alleged violative conduct can continue, transform and take newer forms.  

A ruling of the Supreme Court in dealing with a case of alleged violation of telecom regulations has caused unintended consequences.  The Court found (in the facts of that case and the applicable law) that the allegations of violation were in fact allegations of telecom regulations having been violated. Therefore, rather than have the CCI decide if the Telecom Regulatory Authority of India’s (Trai’s) regulations have been violated, it was considered apt for the Trai to first investigate and assess if there was a violation before the CCI entered the fray.  Quite logical and reasonable but what it has come to mean with the judgment being interpreted as though it is a provision of tax law, is something else altogether.

This ruling has now become a charter for those being investigated by the CCI to argue that if a sectoral regulator exists, the CCI would have no jurisdiction at all unless and until the sectoral regulator has taken a final view.  Such jurisdictional challenges have met with varying degrees of success across courts.  The sectoral regulator taking a final view would yet not be the end of the matter. The appellate tribunal above that sectoral regulator too would have to take a view, after which the Supreme Court would take a view in an appeal from that tribunal.

If the CCI were to be permitted to form a “prima facie” view only after the last court of the land has spoken (interpreting as it does if the sectoral regulator was right), it effectively means that the protection given by Parliament under competition law is rendered still-born — substantially and effectively a repeal of the protections given under the Competition Act.  Entities in sectors that do not even have licensing regulators to regulate their conduct, but only have a limited regulation , say, a tariff regulator, are known to invoke the argument of the sectoral regulator having primacy when the CCI looks at abusive conduct unconnected with tariff.

There is an even more dangerous possibility.  If one were to create a steel regulator or a cement regulator, chances are those regulators would ape the financial sector regulatory model.  In fact, it has been fashionable to style any new regulator as a “SEBI-like regulator”.  The regulator would, therefore, end up registering market participants to create jurisdiction.  Once “registration” is introduced, inspection would have to follow — how else would conduct be checked.  Lo and behold, the “license and inspector raj” would be back.  

Incumbent manufacturers would love it.  They would be able to raise enough concerns about risks to the regulatory system from non-stringent regulation of participants, and successfully dissuade new entrants placing competitive restraints in their path. One should truly be careful of what one wishes for.

The writer is an advocate and independent counsel